San Diego Multifamily Summit Recap – Part 2

San Diego Apartment AppraisalIn our last post, we highlighted discussions from Bisnow’s Multifamily Summit, specifically apartment lending trends, concerns, and predictions.  In part 2 of our recap, we summarize comments made by the apartment development panel.

San Diego Apartment Development Trends

San Diego multifamily development continues to be focused on urban projects. The most active areas of development include urban infill, mixed-use development, transit-oriented development, and development focused on a 24/7 lifestyle. The current trend is a live/work/play environment, so submarkets such as downtown will continue to have opportunity.

Another continuing trend is developing more energy efficient apartment units, especially in light of new energy efficient regulations. For high end, Class A apartments, it is an expectation for a project to be green, so developers are trending toward energy efficient items such as green roofs, solar power, and car charging stations. That said, energy efficiency is not necessarily a huge impact for Class B and Class C apartments. For these types of properties, there is only a benefit if it positively impacts the bottom line.

A third trend is a desire from renters to live in projects with smaller units, but with more amenities. The reason for this is that smaller units make more economic sense, so developers are building more 1-bedroom units and including amenities such as storage. While San Diego may not be experiencing a rise in micro-apartments like San Francisco, the trend is moving toward smaller-sized units.

Future of Condominium Development vs. Apartment Development

For the short-term, the panel stated that there will not be much condominium development in San Diego. While there is some pent-up demand, the focus is on apartment development until condo development makes financial sense. Prior to the last great recession, the panelists agreed that there was a condominium conversion craze, due in part to the fact that financing was easily obtainable. Now, current lending conditions are considered to be “normal” in relation to almost 10 years ago. Despite a lack of condo conversions or development in San Diego, one of the panelists noted that their apartment projects  are either already mapped for condominiums or are being designed for a future condominium conversion.

Development Challenges in San Diego

Several development challenges were discussed during the presentation. The first challenge presented was inventory. The lots that are available to be developed are small; coupled with design requirements imposed by the City of San Diego, developers are required to build subterranean parking, which increases cost.  Another challenge is increased competition from developers due a lack of available projects to develop which is causing developers to move to secondary markets in order to build projects that are financially feasible.  A third challenge is the fact that a large majority of condominium development or conversions are subject to litigation. Litigation is such a concern that developers factor insurance costs into their cost models to covered being sued. Others completely stay away from conversions or, if they sell an apartment complex, add a restriction that prevents conversions.

Summary

The Summit’s development panel discussed a variety of topics centered around trends and challenges to build in San Diego. Overall, areas such as downtown San Diego continue to be the focus for future development. What is interesting to note is that there was little discussion on multifamily development in suburban San Diego. While there was discussion about developing more transit-oriented projects (such as along the proposed trolley line in Clairemont), most of the discussion leaned toward urban apartment projects. For the time being, the downtown is where the focus will be.

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